Checkpoint Contents Accounting, Audit & Corporate Finance Library Editorial Materials Specialized Industries Homeowners' Associations Chapter 1 Overview of Common Interest Realty Associations 100 What Are Common Interest Realty Associations? 100 What Are Common Interest Realty Associations? 100.1 Condominium associations, homeowners' associations, and cooperative housing corporations are the main types of common interest realty associations. They are similar, in some respects, to the neighborhood associations often found in real estate developments of single­family residences. The neighborhood associations typically are concerned about matters such as neighborhood security, development, zoning, traffic, and beautification. Some associations also enforce architectural or other deed restrictions, such as requiring homes to be constructed of brick or fences of a certain design. 100.2 The sole purpose of both types of associations is to serve the collective needs of the neighboring property owners. As the term implies, however, “common interest realty associations” or “CIRAs” refer to organizations of property owners who— • own or have the exclusive right to use their individual living quarters and • share the exclusive use of certain property with all of the other property owners in the development. Common interest realty association is the term used in FASB ASC 972, Real Estate—Common Interest Realty Association. Community association and common interest development (CID) are frequently used in the industry, as well. For simplicity, the FASB's terminology is used in this Guide. Common Characteristics 100.3 As explained beginning at paragraph 100.4, the specific characteristics of CIRAs vary depending on the type of real estate that is owned by the association and by the individual property owners that are members of the association. Even so, all CIRAs have three primary functions—to serve as a business, as a governance structure, and as a community. In addition, the principal activities of all CIRAs are essentially the same: (a) to manage, maintain, repair and replace the common property used by all of the property owners, (b) to provide other services for their members, such as security and trash removal, (c) to enforce compliance with governing documents and state and local statutes and regulations relating to the operations of the CIRA, (d) to enforce rules for the mutual benefit of their members, (e) to equitably assess and collect funds from their members to finance the expenses of operating the CIRA, and (f) to design programs to foster a sense of community. The following characteristics are common to all CIRAs: • CIRAs are separate legal entities established under state laws and composed of the property owners within a specific real estate development. • Property owners in the specific real estate developments may own lots and improvements, defined interior spaces, or shares of stock or membership certificates. • Membership in the CIRA is automatic and cannot be separated from ownership of the underlying real estate. • Funding of the CIRA's operations by periodic assessment of all members. • Association members share the use of common area property within the real estate development (that is, property such as landscaped areas, parking lots, building elevators, and recreational facilities that is not owned and used exclusively by individual members). • Association members are bound by restrictive covenants. • The associations provide a means for self­government of their members through boards of directors that enforce the CIRAs' governing documents and carry out their operations. Types of CIRAs 100.4 It is generally impossible to distinguish CIRAs by the physical appearance of the real estate development. Instead, CIRAs are primarily distinguished by the property that is owned by the CIRA's members and by the CIRA. The principal types of CIRAs are as follows: • Condominium Associations. All unit owners in condominiums own their individual living quarters. They also have an undivided percentage interest in the common property that is inseparable from ownership of the unit itself. Condominium associations generally do not have title to any real property within the development. • Homeowners' Associations (HOAs). Members of homeowners' associations own their own dwelling and the land on which the dwelling sits. The HOAs, rather than the residents, have title to all of the common property within the development. • Cooperative Housing Corporations. Residents of cooperatives own shares of stock (or membership certificates) in the cooperative corporation, which gives them the right to occupy a specific unit in the cooperative. The cooperative housing corporations, rather than the tenant­ shareholders, have title to all real estate within the development, both the common property and the individual units. • Timeshare Developments. The user of a timeshare development is entitled to (a) the right to use a certain accommodation or class of accommodations, generally in weekly increments that occur annually or on some other repeating basis or (b) a fee simple ownership interest in an accommodation, coupled with specified use rights. A resort condominium is an example of a timeshare development. 100.5 Accountants also may encounter the following types of common interest ownership developments: • Townhomes. Townhomes are a form of property ownership in which the property owners own their individual unit and share a common wall and may also share ownership of other common property. If the development does not include other common property, the ownership is typically recorded as conventional real estate with a common wall agreement, and a CIRA is not established. If the development includes other common property, it is typically owned by the CIRA, and accounting would be similar to that for homeowners' associations. “Townhome” may also be used to refer to the style of home rather than the type of association. They may be found in homeowners' associations or condominium associations. • Condominium Trusts. In some states, condominium developments establish nonprofit trusts rather than associations of property owners to manage the common property. If the trusts own all of the property, accounting is similar to that of a cooperative housing corporation. • Master Associations. Developers may establish “master associations” (also referred to as “umbrella associations”) when two or more common interest housing developments share recreational facilities or other common property or receive services as part of a contract covering more than one development. They are responsible for administering the shared common property or providing the shared services and assessing residents of the participating developments for their portion of the related expenses. Alternatively, the master association may assess each participating association for its expenses and the participating association would in turn assess its residents. (The legal environment and income tax issues unique to master associations are discussed in sections 204 and 506, respectively.) • Cohousing Communities. Those communities are less common in the United States and are based on a shared space concept from Denmark. The residents own their individual homes and share in the ownership of common areas, such as dining halls, parking lots, and community gardens. They also contribute a designated number of hours per week to community services, such as gardening, cooking meals, or cleaning up after meals. • Commercial Associations. Those associations provide nonresidential facilities. Examples are industrial parks, shopping centers, professional buildings, parking facilities, marinas, and docks. (The legal environment and income tax issues unique to commercial associations are discussed in sections 204 and 508, respectively.) • Condo­hotel Developments. Condo­hotels are unique in that the legal structure of the development is that of a typical full ownership condominium association, but the operations mimic those of a timeshare association, or a hotel operation. That is, buyers own a unit in the condo­hotel development for a designated number of weeks. The remainder of the year, the condo­hotel unit is rented out as a hotel room. They are generally developed at the high­end, luxury portion of the market and currently are most common in the states of Florida, Nevada, California, and Hawaii. 100.6 Although timeshare developments and commercial associations are similar in some respects to residential associations, they may be subject to unique regulatory, accounting, and tax requirements. The legal environments of timeshare developments and commercial associations are discussed in sections 205 and 206. Unique accounting and tax considerations for timeshare developments are discussed in Chapter 10. Where they differ from residential associations, accounting considerations and tax implications for other nonresidential associations are covered in other chapters of this Guide. 100.7 Residents of some common interest housing developments also may participate in voluntary membership associations that provide security or other services to their members. Voluntary membership associations such as those are not CIRAs; they are not governed by FASB ASC 972. (Some states regulate voluntary homeowners' associations under the states' not for profit corporation statutes.) 100.8 Condominium Associations The condominium form of ownership is a fee simple ownership of defined space, usually within a multi­unit building.